Two Stocks Benefiting From Loud Snorers

These companies will also benefit from the obesity trend, which is not unrelated.

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MINYANVILLE ORIGINAL A few weeks ago, I lay in a bed in a dark room with more than a dozen wires emanating from my head and body while lab technicians monitored me throughout the night. While this may sound like a scene from a sci-fi movie, it was actually just a simple medical examination. I stayed overnight at a sleep center to undergo a polysomnography, or a sleep study.

Luckily, my results showed no sign of a sleeping disorder. But in researching sleep ailments in general, I discovered the staggering statistics about the number of people in the US who suffer from sleep problems. Adults require on average seven to eight hours of restful sleep per night to remain healthy. The stresses of daily life have taken their toll, though, and the average rest period enjoyed by a middle-aged adult in the US decreased by one hour from between eight and nine hours to between seven and eight hours from 1959 to 1992 according to a report titled "How Much Sleep Do Adults Need?" from the National Sleep Foundation. Another study in the same article, based on the daily sleep diaries of full-time workers from 1975 to 2006, found that many slept less than six hours per night. A National Health Interview Survey reported that the percentage of workers receiving less than six hours of rest increased from 24% to 30% over the past 20 years. Many doctors like my own have received training in sleep medicine to meet the demand of those suffering from abnormal sleep.

Not surprisingly, a market has developed around the issue of sleep deprivation. In fact, a portion of the health care sector has flourished over the past decade-and-a-half. As good sleep habits deteriorate, the population ages, and obesity rates climb, the growth of sleep centers in the US has exploded 630% over the past decade-and-a-half. According to Doctor Rebecca Scott of the New York Sleep Institute, 50 million to 70 million individuals struggle with a sleep or wakefulness disorder, such as insomnia, narcolepsy, sleep apnea, or hypersomnia. Sleep disordered breathing problems are the most common. AMedNews reported in July of this year that the total number of sleep centers accredited by American Academy of Sleep Medicine, or AASM, increased from 337 centers in 1996 to 2,461 in June 2012.

The rapid expansion of sleep centers may have already reached its peak, though, according to Fred F. Holt, an otolaryngologist, who provides consulting services to sleep centers. He said in the AMedNews article, "I have no doubt that sleep labs will always be around, but the growth spurt may be over," and the rush of initial investors has slowed. As the US becomes saturated with hospitals and independent sleep centers, these businesses will be forced to compete for patients, hurting revenue.

Source: ResMed

For example, the growth slowdown hit Graymark Healthcare (PINK:GRMH), which operates 105 freestanding and hospital-based facilities across the country, earlier in the year when it announced in March that revenue from diagnostic sleep services declined 16% from $15 million in 2010 to $12.6 million in 2011.

Investors in the business of sleep may now want to shift their attention away from sleep centers to producers of the medical devices for sleep disorders, especially for sleep apnea as sleep centers raise awareness about this under-diagnosed disorder.

Think of the number of family members, guests, and college roommates you've heard snore loudly. Dr. Scott said 17% of male loud snorers and 15% of female loud snorers definitely have sleep apnea, but "the numbers are likely higher than that." Sleep apnea goes undiagnosed in many individuals and as many as half of loud snorers may have sleep apnea, according to the National Sleep Foundation.

People can suffer from one of two forms of sleep apnea: obstructive sleep apnea, or OSA, and central sleep apnea. In both cases, the individual experiences cessation of breathing while sleeping. OSA, the more common of the two forms, occurs when the soft tissue in the back of the throat collapses, and is often related to obesity. Central sleep apnea occurs when the brain fails to signal muscles to breathe due to instability in the respiratory control center.

Individuals with the disorder may stop breathing hundreds of times per night, restricting oxygen flow to the brain and other parts of the body. Undesirable complications can arise from sleep apnea, such as insomnia, high blood pressure, stroke, heart failure, diabetes, and depression.

Based on doctors' estimates, the market for individuals with sleep apnea may explode in the coming years. In the US, doctors estimate that between 12 million and 40 million individuals suffer from sleep apnea. The number varies widely because doctors believe up to 85% of people with sleep apnea in the US may be unaware they have the disorder. Over 100 million people worldwide suffer from sleep apnea, and doctors believe that less than 80% of individuals with the disorder around the world know they suffer from the disease.

Treatment of sleep apnea often requires wearing a mask connected to an air flow generator, which pushes oxygen through a person's nose into his or her lungs as he or she sleeps. WebMD describes the continuous positive airway pressure, or CPAP, treatment as the "preferred initial treatment" for OSA. The sleep apnea diagnostic and therapeutic device market is expected to grow from $7.96 billion in 2011 to $19.72 billion in the year 2017, according to MarketsandMarkets. (You can view air flow generators here and masks here.)

Source: ResMed
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An Investors.com article quotes analyst Michael Matson of Mizuho Securities as saying, "The (sleep-disorder) market is growing a lot faster than other things in the medical-devices sector." Analysts see the sleep-disorder market growing 6% to 8% per year.

ResMed (NYSE:RMD) and Philips Respironics (a division of Philips Electronics (NYSE:PHG)) are positioned to benefit from the sleep apnea trend. Both companies supply the bulk of the masks and air generators to individuals worldwide. According to Investors.com, analysts estimate that ResMed and Philips Respironics control 70% to 80% of the worldwide sleep-disordered device market. ResMed CEO Peter Farrell stated ResMed controls 42% of the market while Philips controls 38% of the market.

A family member of mine suffers from sleep apnea, and when I checked the brand of the air flow generator, he had a ResMed device in his bedroom.

Of the two, ResMed will be more sensitive to the growth of sleep apnea diagnosis. The company describes itself as focused solely on producing and selling medical products for the treatment and management of respiratory disorders "with a focus on sleep-disordered breathing."

JPMorgan analysts wrote in a letter to clients, "We think ResMed is unquestionably the strongest manufacturer of masks." The San Diego-based company sells approximately 200,000 devices and 700,000 masks every month, and analysts expect ResMed to grow earnings 13% in 2013. For its fiscal first quarter of 2013, ResMed's revenue grew 8% year-over-year to $339.7 million.

Philips Electronics' third-quarter net income increased from 76 million euros, or 0.08 euros per share, in the prior-year quarter to 170 million euros, or 0.18 euros per share. (View its third-quarter financial results here.)

Meanwhile, US mask sales grew 13% in the third quarter of this year and US flow generator sales grew 17% in the same quarter.

CareFusion Corporation (NYSE:CFN) and Natus Medical (NASDAQ:BABY) are other players in the sleep apnea diagnostic and therapeutic device market.

The coinciding trend of growing waistlines will also benefit these device producers. As mentioned above, OSA is often related to body size -- in fact, more than half of those who suffer from OSA are also overweight. Obese and overweight individuals have larger amounts of fatty tissue around the neck, which puts greater pressure on the the throat and raises the chances of it collapsing while sleeping.

A report released earlier in the year categorized 34% of people in the US as obese. The Organization for Economic Co-operation and Development released a different report earlier in the year projecting that by 2020, 75% of the US population will be obese.

Unless Americans start slimming down, more of us will be wearing nasal masks to bed.